UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

or

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission file number: 333-184682

 

AVANGARD CAPITAL GROUP INC.

(Exact name of registrant as specified in its charter)

 

Nevada		45-5507359
(State or other jurisdiction		(IRS Employer
of incorporation)		Identification No.)

 

2708 Commerce Way Suite 300, Philadelphia PA		19154
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (954) 363-7333

Not Applicable.

(Former name or former address, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

Large accelerated filer	[  ]		Accelerated filer	[  ]
Non-accelerated filer	[  ]		Smaller reporting company	[X]
(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [  ] No [X]

 

As of May 1, 2014 there were 10,134,664 shares issued and outstanding of Registrant’s Common Stock.

  

  

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)		F-1
	Condensed Balance Sheets as of March 31, 2014 and June 30, 2013 (unaudited)		F-1
	Condensed Statements of Operations for the Three and Nine months Ended March 31, 2014 and 2013 (unaudited)		F-2
	Condensed Statements of Comprehensive Loss for the Three and Nine months Ended March 31, 2014  and 2013 (unaudited)		F-3
	Condensed Statements of Cash Flows for the Nine months Ended March 31, 2014 and 2013 (unaudited)		F-4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
Item 3	Quantitative and Qualitative Disclosures About Market Risk		5
Item 4	Controls and Procedures		5
PART II - OTHER INFORMATION
Item 1	Legal Proceedings		6
Item 1A	Risk Factors		6
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		6
Item 3	Defaults Upon Senior Securities		6
Item 4	Mine Safety Disclosures		6
Item 5	Other Information		6
Item 6	Exhibits		6
Signatures			7

 

 

PART 1 - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AVANGARD CAPITAL GROUP, INC.

CONDENSED BALANCE SHEETS

(unaudited)

 

		March 31, 2014				June 30, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	446,263			$	164,049
Marketable securities			-				378,203
Floor plan financing receivable (net of allowance for doubtful accounts of $115,000 at March 31, 2014)			114,250				252,220
Used car auto finance receivables			-				48,868
Fees receivable			-				11,218
Interest receivable			-				9,807
Related party receivable (See Note 6)			2,325				-
Other current assets			-				2,980
Total current assets			562,838				867,345
Property and equipment, net			3,464				3,863
Total assets		$	566,302			$	871,208
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	103			$	2,994
Total current liabilities			103				2,994
Stockholders’ equity:
Convertible Preferred Stock Series A, $0.0001 par value, 300,000,000 authorized, 905,000 issued and outstanding			90				90
Common stock, $0.0001 par value, 1,000,000,000 authorized; Class A, 10,134,664 shares issued and outstanding			1,013				1,013
Additional paid in capital			1,106,893				1,106,893
Stock subscription receivable			-				(135,996	)
Accumulated other comprehensive income			-				24,225
Accumulated deficit			(541,797	)			(128,011	)
Total stockholders’ equity			566,199				868,214
Total liabilities and stockholders’ equity		$	566,302			$	871,208

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

AVANGARD CAPITAL GROUP, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

  

		For the Three Months Ended March 31,								For the Nine Months Ended March 31,
		2014				2013				2014				2013
REVENUE
Fee revenue		$	151			$	7,166			$	25,709			$	23,712
Interest revenue			3,302				5,722				27,236				20,273
Total revenue			3,452				12,888				52,945				43,985
OPERATING EXPENSES
Selling, general and administrative			126,720				32,189				389,873				100,422
Provision for doubtful accounts			141,591								141,591
Total operating expenses			268,311				32,189				531,464				100,422
Loss from operations			(264,858	)			(19,301	)			(478,519	)			(56,437	)
Other income
Gain on sale of marketable securities (includes $12,079 accumulated other comprehensive income reclassifications for unrealized net gains)			-				-				58,091				-
Interest and dividend income			1,289				643				6,642				1,359
Total other income			1,289				643				64,733				1,359
Net loss		$	(263,569	)		$	(18,658	)		$	(413,786	)		$	(55,078	)
Net loss per share attributable to common shareholders - basic and diluted		$	(0.03	)		$	(0.00	)		$	(0.04	)		$	(0.01	)
Weighted average number of common shares - basic and diluted			10,134,664				10,000,000				10,134,664				10,000,000

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

AVANGARD CAPITAL GROUP, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

  

		For the Three Months Ended March 31,								For the Nine Months Ended March 31,
		2014				2013				2014				2013
Net loss		$	(263,569	)		$	(18,658	)		$	(413,786	)		$	(55,078	)
Other comprehensive income
Net change in unrealized gain on marketable securities			-				16,906				(24,225	)			16,906
Total comprehensive loss		$	(263,569	)		$	(1,752	)		$	(438,011	)		$	(38,172	)

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

AVANGARD CAPITAL GROUP, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the Nine Months Ended March 31,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(413,786	)		$	(55,078	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			399				-
Gain on sale of marketable securities			(58,091	)			-
Provision for doubtful accounts			141,591				-
Changes in operating assets and liabilities:
Floor plan financing receivable			(3,621	)			38,255
Used car auto financing portfolio			48,868				(94,890	)
Fees receivable			11,218				(2,804	)
Interest receivable			9,807				(2,813	)
Related party receivable			(2,325	)			-
Other assets			2,980				(10,109	)
Accounts payable and accrued expenses			(2,891	)			12,071
NET CASH USED IN OPERATING ACTIVITIES			(265,851	)			(115,368	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities			(34,369	)			(525,047	)
Sales of marketable securities			446,438				-
NET CASH PROVIDED BY INVESTING ACTIVITIES			412,069				(525,047	)
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible preferred stock subscription received			-				744,451
Common stock subscription received			135,996
NET CASH PROVIDED BY FINANCING ACTIVITIES			135,996				744,451
Net increase in cash			282,214				104,036
Cash and cash equivalents beginning of the period			164,049				20,696
Cash and cash equivalents at end of the period		$	446,263			$	124,732

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

AVANGARD CAPITAL GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2014

 

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Description of Business Avangard Capital Group, Inc., a Nevada corporation is referred to in this report as “we”, “us”, “our”, “ACG”, the “Company” or “Avangard Capital Group.”

 

We were incorporated June 13, 2012 under the laws of the State of Nevada. Our executive offices are located at 2708 Commerce Way, Suite 300, Philadelphia, PA 19154.

 

We are an independent auto sales finance company that provides floor plan financing for independent used car dealers based on the value of collateral (the car) as determined by us using the automobile industry’s nationally-recognized valuation sources. We operate in the states of New Jersey, Pennsylvania and Florida. We commenced business June 22, 2012 with the purchase of all floor plan receivables from Avangard Auto Finance, Inc. (“AAF”), an affiliate. Pursuant to an Assignment Agreement with AAF dated June 13, 2012, we acquired AAF’s floor plan financing portfolio for $151,979, the face value of the contracts plus accrued interest and fees at that time.

 

In January 2013 we received approval and were licensed by the States of Florida and New Jersey as a Sales Finance Company. In February 2013, we were licensed in the Commonwealth of Pennsylvania as a Sales Finance Company. These licenses permit us to expand our operations to providing financing for auto sales by dealers.

 

On March 26, 2013 we acquired certain retail installment contract receivables from AAF and Avangard Financial Group, Inc., a related party (“AFG”) for $102,250. The receivables consisted of an aggregate principal balance of approximately $141,868 for current loans receivables and approximately $323,449 for non-current loans receivables.

 

Interim Financial Statements

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these financial statements are adequate to make the information presented not misleading. The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the nine months ended March 31, 2014 are not necessarily indicative of the results expected for the full year or for any subsequent interim periods. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes to those statements included in our Annual Report on Form 10-K for the period ended June 30, 2013 filed on September 30, 2013.

 

Use of Estimates

 

We use estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

  

Cash and Cash Equivalents

 

Cash and cash equivalents include highly liquid investments with an original maturity of three month or less when purchased.

 

Fair Value of Financial Instruments

 

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced sale or liquidation. Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical cost amounts. The carrying value of cash, floor plan financing receivable, and accounts payable approximate the fair value because of the short maturity of those instruments.

 

The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

 

  

AVANGARD CAPITAL GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2014

 

The three levels are defined as follows:

 

Level 1:	inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2:	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3:	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

Marketable securities were measured at fair value using Level 1 inputs derived from quoted prices in active markets. In December 2013 the company converted 100% of their Marketable Securities to cash and cash equivalents.

 

Marketable Securities

 

Our marketable equity securities are classified and accounted for as available-for-sale and reported at fair value. Unrealized gains and losses related to changes in the fair value of securities are recognized in accumulated other comprehensive income, net of tax in our balance sheets. Changes in the fair value of available-for sale securities impact our net income only when such securities are sold or other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the available-for-sale designations as of each balance sheet date.

 

Revenue Recognition

 

Interest income from floor plan financing receivable is recognized using the interest method. Accrual of income on finance receivables is suspended when a contract is contractually delinquent for ninety (90) days or more. The accrual is resumed when the contract becomes contractually current and past due interest is recognized at that time.

 

Origination Fees are recognized for services provided during the loan origination process at the point in time the loan is funded.

 

The Company accounts for its investment in floor plan financing receivables using the interest method, under ASC 310 pools of accounts are established based on certain common risk criteria. Each pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision.

 

The Company accounts for its investment in retail installment contract receivables it acquired on March 26, 2013 using the cost recovery method as the Company’s collections on this particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the retail installment contract receivables portfolio has been fully recovered. This pool of accounts can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.

 

Floor Plan Financing Receivable

 

Floor plan financing receivable consists of purchased automobiles, which were assigned to us upon acquisition. The titles to the automobiles, which serve as security for the payment of the purchased contracts, are held by us.

 

Floor plan financing receivable that we intend and have the ability to hold for the foreseeable future, or until maturities of payoff are reported at their outstanding gross contractual balances, net of allowance for losses and unearned finance revenue. Unearned finance revenue consists of unearned interest and discounts realized on contract purchases.

 

We perform periodic evaluations of the adequacy of the allowance for losses taking into consideration the past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, as well as recovery potential of any underlying collateral, personal guarantees and current economic conditions. Any increases in the allowance for losses subsequent to the acquisition of the contract are charged to earnings.

 

Our primary floor plan customer defaulted on their agreement in February 2014. The floor plan agreement carried personal guarantees and confessions of judgment, in addition to first lien on all vehicles subject to the floor plan agreement. In March 2014, the customer filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. We repossessed 9 of the 21 vehicles subject to the floor plan agreement from the debtor prior to its Chapter 11 filing. Additionally, there is a question of the legality of the debtor’s sale of four (4) vehicles which were subject to financing. Since we are unable to determine the exact amount of ultimate losses, on March 31, 2014 we provided a reserve for uncollectible receivables of $115,000. As of June 30, 2013 no provision for losses had been made.

 

 

AVANGARD CAPITAL GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2014

  

Used Car Auto Financing

 

On March 26, 2013, we acquired a portfolio of consumer automobile loans from Avangard Auto Finance, Inc., (“AAF”), a related party.

 

The Company is an indirect lender from a legal perspective, meaning the loan is originated by the dealer and immediately assigned to the Company. Typically, the loan is purchased from the dealer. The disbursement to the dealer is calculated using our guidelines as to the value of the automobile. The amount advanced against the collateral is 85% of the “Black Book” liquidation value of the car. From time to time we will have automobiles in inventory as a result of repossessions due to non-payment. Our policy is to issue a repossession order after 15 days delinquency of the loan.

 

As of the date of acquisition, the entire Used Car Auto Financing Portfolio’s collection could not be reasonably predicted by the Company; therefore the modified cost recovery method has been utilized to account for the pool of loans. As of March 31, 2014 the Company recovered its entire investment in the loan portfolio. As of March 31, 2014, we collected 100% of the aggregate amount of the Company paid to acquire this loan portfolio. On February 19, 2014 we transferred all remaining loans receivable to AAF as we determined that the outstanding balances were either uncollectible or difficult to collect and the Company did not believe that pursuing further collection efforts was a good use of the Company’s resources.

 

Stock-based Compensation

 

We account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions with employees and directors. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares of our common stock instead of settling such obligations with cash payments.

 

Comprehensive Income

 

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive income consists of unrealized gains on marketable securities categorized as available-for-sale.

 

Concentrations of Credit Risk

 

The Company’s assets exposed to credit risk are cash and finance and interest receivables.

 

For the nine months ended March 31, 2014, one significant customer accounted for 94% for both revenue and accounts receivable of total revenue and floor plan financing receivable.

 

The Company maintains its cash balances in Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. At times, cash balances may exceed the maximum insurance offered by FDIC.

 

Property and Equipment

 

Fixed assets are recorded at their historical cost upon acquisition or cost of construction. The assets are depreciated using the straight line method over their statutory lives. The fixed asset categories and their estimated lives are as follows:

 

Office Equipment 5 years

 

Income Taxes

 

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended March 31, 2014.

 

 

AVANGARD CAPITAL GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2014

 

 NOTE 2 - MARKETABLE SECURITIES AND CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Marketable Securities

 

Marketable equity securities purchased during the current fiscal year were classified and accounted for as available-for-sale. As of March 31, 2014 all marketable equity securities were converted to cash and cash equivalents.

 

We recognized $0 of net realized gains during the quarter ended March 31, 2014 and $58,091 for the nine months ended March 31, 2014. Realized gains on the sale of the securities are determined by specific identification of each security’s cost basis.

 

Changes in Accumulated Other Comprehensive Income:

 

The following table shows the accumulated other comprehensive income balance as of March 31, 2014:

 

		Unrealized Gain on  Marketable Securities
Balance at June 30, 2013		$	24,225
Other comprehensive income before reclassifications			(12,146	)
Net current-period other comprehensive income			12,079
Amounts reclassified from accumulated other comprehensive income			(12,079	)
Balance at March 31, 2014		$	-

 

NOTE 3 - INCOME TAXES

 

The provision for income taxes consists of the following:

 

		March 31, 2014				September 30, 2013
Deferred Tax Asset		$	203,000			$	52,695
Less: Valuation Allowance			(203,000	)			(52,695	)
Net Deferred Tax Assets		$	-			$	-

 

As of March 31, 2014, the Company has net operating loss carry forwards of $541,797 that can be utilized to offset future taxable income for Federal and State income tax purposes through 2024, generating a maximum deferred tax benefit of $203,000 by applying Federal and State statutory tax rates. The Company applied a 100% valuation reserve against the deferred tax benefit, as the realization of the benefit is not certain.

 

The following tax years remain subject to examination by the respective tax jurisdictions.

 

			Fiscal Years ending June 30,
Internal Revenue Service			2012 - 2013
Commonwealth of Pennsylvania			2012 - 2013

 

NOTE 4 - COMMON AND PREFERRED STOCK

 

We are authorized to issue 1,000,000,000 shares of $0.0001 par value common stock of which 10,134,664 shares have been issued and are outstanding, designated Class A at March 31, 2014 and June 30, 2013. A total of 114,664 shares of the Company’s common stock were issued during the year ended June 30, 2013 in connection with the sale of 28,666 Units in the Offering discussed below. The Company received proceeds of $171,985 in connection with the sale of the Units of which, $135,996 was a subscription receivable at June 30, 2013 and was subsequently collected on July 5, 2013.

 

We are authorized to issue 300,000,000 shares of $0.0001 par value Convertible Preferred Stock Series A of which 905,000 shares have been issued and outstanding at March 31, 2014 and June 30, 2013, respectively.

 

Offering of Securities

 

On February 13, 2013, our Registration Statement on Form S-1 was declared effective by the SEC whereby we offered 5,000,000 units (the “Offering”), each unit consisting of four shares of our common stock and one redeemable common stock warrant (a “Warrant”) at a public offering price of $6.00 per unit (a “Unit”). The Warrants became exercisable and separately transferable from the shares 30 calendar days after February 13, 2013. At any time thereafter until three years following February 13, 2013, subject to earlier redemption, each Warrant entitles the holder to purchase one share of our common stock at an exercise price of $2.00 (133% of the per share price of the common stock included in the Units), subject to adjustment. The Warrants are subject to redemption for $0.0001 per Warrant upon 30 days prior written notice, provided that the last sale price of our common stock equals or exceeds $3.00 (150% of the Warrant exercise price), subject to adjustment, for 10 consecutive trading days. As of March 31, 2014, 28,666 units have been sold and no warrants have been exercised. The Offering expired on August 14, 2013.

 

  

AVANGARD CAPITAL GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2014

 

Common Stock Purchase Warrants

 

A summary of the status of our outstanding common stock purchase warrants granted as of March 31, 2014 and changes during the period is as follows:

 

		Shares				Weighted
		Underlying				Average
		Warrants				exercise price
Outstanding and exercisable at June 30, 2013			28,666			$	2.00
Additions			-				-
Outstanding and exercisable at March 31, 2014			28,666			$	2.00

 

The following information applies to all warrants outstanding and exercisable at March 31, 2014

 

Number of Warrants
outstanding and							Remaining contractual
exercisable			Exercise Price				life (Years)
28,666			$	2.00			1.83

 

NOTE 5 - LOSS PER SHARE

 

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. The Company’s potential dilutive shares, which include convertible preferred shares and shares issuable upon exercise of the Warrants, have not been included in the computation of diluted net loss per share as the result would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. All potential common shares have been excluded from the computation of the dilutive net loss per share for the period presented because the effect would have been antidilutive. Such potential common shares consist of the following:

 

		March 31, 2014				March 31, 2013
Convertible preferred stock			2,715,000				2,715,000
Warrants attached to units sold			28,666				-

 

NOTE 6 - RELATED PARTY TRANSACTIONS

 

We entered into a lease agreement for office space with Commerce Way, LLC (“CWL”). CWL is owned by DJS Investments, LLC and SELF, LP. SELF, LP is a shareholder of Friedman Financial Group, who is a principal shareholder of our company. The lease requires monthly payments, commencing August 1, 2012, of $2,500 on a month to month basis. No security deposit was required. Rent expense for the three months ended March 31, 2014 and 2013 was $7,500 and $7,500 respectively. Rent expense for the nine months ended March 31, 2014 and 2013 was $22,500 and $22,500 respectively.

 

On March 26, 2013 we entered into an Retail Installment Contract Receivable Purchase Agreement (the “Purchase Agreement”) with Avangard Auto Finance, Inc. and Avangard Financial Group, Inc. (the “Sellers”), both of whom are our affiliates. Under the terms of the Purchase Agreement, we agreed to pay the Sellers $102,250 (the “Purchase Price”) to purchase certain of their retail installment contract receivables as of the date of the agreement. These amounts included an aggregate principal balance of approximately $141,868 for current loans receivables (the “Current Loans”) and an aggregate principal balance of approximately $323,449 for non-current loans receivables (the “Non-Current Loans”). The Sellers guaranteed to us that we will recover no less than 70% of the aggregate amount of the Current Loans. If we recover less than 70% of the aggregate amount of the Current Loans, the Sellers shall pay the difference to us upon demand. On February 19, 2014 we transferred all remaining loans receivable to AAF as we determined that the outstanding balances were either uncollectible or difficult to collect and the Company did not believe that pursuing further collection efforts was a good use of the Company’s resources.

 

Robert Cornaglia, a member of the Board of Directors, provided certain consulting services to the Company during the quarter ended March 31, 2014 for which the Company incurred expenses of $9,800

 

Officers and related parties of our company provide certain administrative expenses at no charge.

 

Related party receivable of $2,375 reflects amounts due from the Company’s Chief Executive Officer for unreimbursable expenses.

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under the “Risk Factors” section of our Annual Report on Form 10-K as filed with the SEC on September 30, 2013:

 

	●	Our limited operating history and ability to achieve profitability.
	●	Our ability to assure that related party transactions are fair to our company.
	●	Our ability to manage growth in our business.
	●	Our dependence on one floor plan financing agreement.
	●	The impact of the volatility in the worldwide credit and equity markets.
	●	The departure of our CEO, director and principal financial officer has increased our dependence on the services provided by Simon Friedman, Chairman of the Board of Directors and interim CEO, who can exercise disproportionate voting control over corporate decisions.
	●	The super voting power of our interim CEO and director who holds shares of the Series A Convertible Preferred Stock.
	●	Write-Offs for losses and defaults on our floor plan receivables.
	●	The impact of changes in interest rates.
	●	Increased costs as a result of becoming a reporting company.
	●	Our ability to maintain an effective system of internal controls over financial reporting.
	●	The affects on our stock price as a result of sales of our common stock by existing shareholders pursuant to Rule 144.

 

On December 11, 2013 Alan Gulko, the President and CEO of the company, resigned from the company and the Board of Directors. Simon Friedman, Chairman of the Board and majority shareholder, has assumed the position of interim CEO.

 

We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

OVERVIEW

 

We are an independent auto sales finance company that provides floor plan financing and auto financing for independent used car dealers. The loans made are based on the value of collateral (the car) as determined by us using the automobile industry’s nationally-recognized valuation sources. We currently operate in Pennsylvania, New Jersey and Florida. Our current operations are focused on the management of a floor plan financing portfolio we acquired in June 2012 and retail installment contract receivables we acquired in March 2013 as discussed below.

 

 

In furtherance of our expansion into automotive consumer loans, we acquired certain retail installment contract receivables from our affiliates AAF and AFG on March 26, 2013 for $102,250. The receivables consisted of an aggregate principal balance of approximately $141,868 for current loans receivables and approximately $323,449 for non-current loans receivables. The sellers guaranteed to us that we will recover no less than 70% of the aggregate amount of the current loans. If we recover less than 70% of that amount, the sellers agreed to pay the difference to us upon demand. As of March 31, 2014, we collected 100% of the aggregate amount of the Purchase Price. On February 19, 2014 we transferred all remaining loans receivable to AAF as we determined that the outstanding balances were either uncollectible or difficult to collect and the Company did not believe that pursuing further collection efforts was a good use of the Company’s resources.

 

We are licensed as a Sales Finance Company by the States of Florida and New Jersey since January 2013 and by the Commonwealth of Pennsylvania since February 2013. These licenses permit us to expand our operations to providing financing for auto sales by dealers.

 

As discussed in our February 13, 2013 prospectus filed with the SEC, we sought to raise up to $30,000,000 by selling 5,000,000 Units, each Unit consisting of four shares of our common stock and one redeemable common stock warrant at a public offering price of $6.00 per Unit (the “Offering”). We sold 28,666 Units in this Offering for an aggregate offering price of $171,985. The Units are comprised of 114,664 shares of our common stock and 28,666 common stock purchase warrants exercisable at a price of $2.00 per share. The Offering expired on August 14, 2013.

 

On December 11, 2013 Alan Gulko, the President and CEO of the company, resigned from the company and the Board of Directors. Simon Friedman, Chairman of the Board and majority shareholder, has assumed the position of interim CEO while we evaluate new financing opportunities.

 

Our primary floor plan customer defaulted on their agreement in February 2014. The floor plan agreement carried personal guarantees and confessions of judgment, in addition to first lien on all vehicles subject to the floor plan agreement. In March 2014, the customer filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. We repossessed 9 of the 21 vehicles subject to the floor plan agreement from the debtor prior to its Chapter 11 filing. Additionally, there is a question of the legality of the debtor’s sale of four (4) vehicles which were subject to financing. Since we are unable to determine the exact amount of ultimate losses, on March 31, 2014 we recorded a reserve for uncollectible receivables of $115,000. As of June 30, 2013 no provision for losses had been made.

 

RESULTS OF OPERATIONS

 

Revenue

 

Total revenue decreased $9,436 to $3,452 for the quarter ended March 31, 2014 compared to $12,888 in the quarter ended March 31, 2013 primarily as a result of decreases in fee revenue derived from floor plan financing receivables as our sole customer ceased operations during the period ended March 31, 2014 when it filed for bankruptcy protection discussed above. Total revenue increased $8,960 to $52,945 for the nine months ended March 31, 2014 compared to $43,985 in the quarter ended March 31, 2013. This increase is primarily due to interest earned from loans outstanding for longer periods of time partially offset by decreases in fee revenue discussed above.

 

Operating Expenses

 

Total operating expenses increased $236,122 to $268,311 for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013. This increase is primarily a result of a $141,591 provision for doubtful accounts related to uncollectible receivables discussed above and a $94,531 increase in selling, general and administrative expenses.

 

Total operating expenses increased $289,451 to $389,873 for the nine months ended March 31, 2014. For the nine months ended March 31, 2014 our expenses were comprised primarily of $180,512 related to legal, accounting and SEC compliance costs, $41,772 in business development expenses, $19,798 for computer related services and software, and $22,500 for rent, other occupancy costs of $36,686, wages and related expenses of $50,960, and other office expenses of $37,645

 

Other Income

 

Other income is comprised of interest, dividends and realized gains from the sale of marketable securities. Other income increased to $63,874 for the nine months ended March 31, 2014 as compared to $1,359 for the nine months ended March 31, 2013 as a result of dividends and gain from the sale of all of our remaining marketable securities. The company realized a gain of $0 and $58,091 from the sale of the company’s marketable securities during the three and nine months ended March 31, 2014, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of March 31, 2014 our working capital amounted to $562,735, a decrease of $301,616 as compared to $864,351 as of June 30, 2013. Working Capital included primarily cash and cash equivalents of $446,263, floor plan financing receivables of $114,250 net of an allowance for uncollectible accounts of $115,000, and related party receivable of $2,325.

 

 

We financed operations through cash flows from financing activities transactions and to a lesser extent, cash generated from our operations. Net cash used in operating activities for the nine months ended March 31, 2014 was $265,851, which primarily reflected an increase in net loss partially offset by an increase in a non-cash reserve for floor plan financing receivable, used car auto financing portfolio, fees and interest receivables related to the floor plan and a gain on sale of marketable securities. Floor plan financing receivables decreased by $141,591 for the nine months ended March 31, 2014 compared to a decrease of $38,255 in floor plan financing receivables for the nine months ended March 31, 2013. The reduction is due primarily to the provision for uncollectible accounts of $115,000. We collected $48,868 in used car auto financing receivable during the nine months ended March 31, 2014 compared to $94,890 for the nine months ended March 31, 2013. Accounts payable and accrued expenses decreased by $2,890 for the nine months ended March 31, 2014 compared to an increase of $12,071 for the nine months ended March 31, 2013. Operating cash flow was also decreased by an increase in related party receivables of $2,325.

 

Net cash provided by investing activities for the nine months ended March 31, 2014 was $412,069, from the net proceeds of the sale of marketable securities.

 

Net cash provided by financing activities for the nine months ended March 31, 2014 was $135,996, primarily from subscription received in connection with the sale of common stock. Net cash provided by financing activities for the quarter ended March 31, 2013 was $744,451 stemming from the sale of Convertible Preferred Stock Series A.

 

 

Cash Requirements

 

Our future capital requirements will depend on numerous factors, including the amount of auto dealer floor plan financing we provide and the rate at which we expand our operations, the profitability of operations and our ability to control costs.

 

We do not currently have any contractual restrictions on our ability to incur debt and, accordingly we could incur significant amounts of indebtedness to finance operations. Any such indebtedness could contain covenants which would restrict our operations.

 

Although we anticipate a reduction in revenues as a result of the default and bankruptcy of our primary floor plan customer, we have adequate resources to operate at a minimal level while we pursue recovery of our floor plan receivable balance, and explore new opportunities.

 

Off-Balance Sheet Arrangements

 

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. As of March 31, 2014 we have no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, who is also our Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO who is also our Principal Financial and Accounting Officer performed an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2014. Based on that evaluation, our management, including our CEO who is also our Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were ineffective as of March 31, 2014.

 

In addition, management identified the following material weakness and significant deficiencies in its assessment of the effectiveness of internal control over financial reporting as of March 31, 2014:

 

	●	Material Weakness – The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with the Company’s financial reporting requirements.
	●	Significant Deficiencies – Inadequate segregation of duties.

 

  

We expect to be materially dependent upon a third party to provide us with accounting consulting services for the foreseeable future. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses and significant deficiencies in our disclosure controls and procedures and internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements.

 

Our management, including our Chief Executive Officer and our Principal Financial and Accounting Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

Changes in Internal Control

 

There were no changes identified in connection with our internal control over financial reporting during the three months ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable

 

ITEM 5. OTHER INFORMATION.

 

None

 

ITEM 6. EXHIBITS.

 

Exhibit No.		Description
31.1		Section 302 Certificate of Chief Executive Officer.*
31.2		Section 302 Certificate of Principal Financial and Accounting Officer.*
32.1		Section 906 Certificate of Chief Executive Officer and Principal Financial and Accounting Officer.*
101.INS		XBRL INSTANCE DOCUMENT **
101.SCH		XBRL TAXONOMY EXTENSION SCHEMA **
101.CAL		XBRL TAXONOMY EXTENSION CALCULATION LINKBASE **
101.DEF		XBRL TAXONOMY EXTENSION DEFINITION LINKBASE **
101.LAB		XBRL TAXONOMY EXTENSION LABEL LINKBASE **
101.PRE		XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE **

 

*	Filed herewith.
**	In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this 1 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	AVANGARD CAPITAL GROUP, INC.
Date: May 20, 2014	By:	/s/ Simon Friedman
		Simon Friedman
		Chairman and Chief Executive Officer
		(Principal Executive Officer and Principal Financial and Accounting Officer)